Grantor Deemed Owned Trusts (GDOTs) Part 2 - Advanced Estate Planning
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Learn how Grantor Deemed Owned Trusts (GDOTs) are used in advanced estate planning cases. Learn more at www.inknowvision.com
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Grantor Deemed Owned Trusts (GDOTs) Part 2 - Advanced Estate Planning
- 1. GDOTs Grantor Deemed Owned Trusts SCOTT HAMILTON, CEO INKNOWVISION, LLC WWW.INKNOWVISION.COM 630-596-5090 X80 Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 2. Grantor Deemed Owned Trusts Overview Benefits Issues Technical How they are used Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 3. Typical Scenario Goal: pass assets to heirs Client’s Estate Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 4. Typical Scenario We add an intermediate entity to serve valid business purposes. Client’s Estate LLC or FLP Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 5. Valid Business Purposes Protect your family’s future Saving gift taxes Asset protection Centralized management Flexible business planning Make family loans easier Maintain privacy Facilitate annual gifting Restrict non-partners from ownership Dead Hand Control Reduce estate taxes Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 6. Typical Scenario We add a GDOT Client’s Estate LLC or FLP GDOT Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 7. Typical Scenario The Client funds the entity and receives membership interests in return Client’s Estate LLC or FLP GDOT Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 8. Typical Scenario The Client sells membership interests to GDOT Client’s Estate LLC or FLP Units GDOT Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 9. Typical Scenario The Client sells membership interests to GDOT for FMV consideration Client’s Estate LLC or FLP GDOT Cash/Notes/Other Assets of equal value Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 10. Variation on a 2011 Theme The Client gifts membership interests to GDOT and uses exemption Client’s Estate LLC or FLP Outright Gift GDOT Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 11. Typical Scenario The LLC makes distributions to the GDOT Client’s Estate LLC or FLP Income Distributions GDOT Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 12. Typical Scenario The GDOT makes payments on the notes Client’s Estate LLC or FLP GDOT Promissory Note Payments Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 13. Typical Scenario Net Equity/Appreciation Goes to beneficiaries Client’s Estate LLC or FLP Net Equity/Appreciation GDOT Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 14. GDOT-BENEFITS Grantor pays taxes on income of GDOT Grantor pays taxes on income of GDOT Allows income tax free transactions between grantor & GDOT GDOT is a qualified S corporation shareholder/LLC Member Overcome Transfer-For-Value Rules - Old ILIT to New Appreciation out of estate Insurance Funding Application Distributions can fund beneficiary’s inheritance Distributions can fund charitable giving Asset Protection Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 15. BENEFITS Grantor pays taxes on income of GDOT LLC or FLP Grantor Taxable Income K-1 to GDOT GDOT Taxable income attributed to Grantor Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 16. BENEFITS Grantor pays taxes on income of GDOT Grantor LLC or FLP GDOT Tax Free Build Up Additional Gift Equal to Taxes Paid Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 17. BENEFITS Allows income tax free transactions between grantor & GDOT Grantor LLC or FLP Low or High Basis Units GDOT No Gain or Loss Recognized • Sale of Units • Transfer of Units • Interest payments on notes Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 18. BENEFITS GDOT is a qualified S corporation shareholder/LLC Member Grantor LLC /CORP S Election GDOT Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 19. BENEFITS Overcome Transfer-For-Value Problem - Old ILIT to New Grantor LLC /CORP S Election Old ILIT Sale of policy Insured=Grantor GDOT Children Transfer for value exception Grandchildren “Transfer to the Insured” Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 20. BENEFITS Appreciation of assets should be on the other side of the tax wall Grantor LLC or FLP T a Appreciation happens on x the other side of the tax wall W a GDOT l l Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 21. ISSUE Caution: 2036 can create a hole in the wall! Grantor 2036 LLC or FLP T a x W a GDOT l l Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 22. BENEFITS Insurance Funding Application Grantor LLC /CORP S Election GDOT Distributions from LLC Owns Life Insurance can fund premium payments Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 23. BENEFITS Early Inheritance Grantor LLC /CORP S Election GDOT Distributions from LLC Owns Life Insurance can fund inheritance or make loans Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 24. BENEFITS Charitable Giving Grantor LLC /CORP S Election Tax Deduction GDOT Distributions from LLC Owns Life Insurance can fund charitable giving Charities of Choice Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 25. BENEFITS Asset Protection Grantor P LLC or FLP r o t e Grantor’s creditors should c not be able to pierce t GDOT protection wall i o n Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 26. ISSUE Caution: Promissory Note May Not Be Protected Grantor P LLC or FLP r o Note t e Creditor’s may be able to c get note and payments t GDOT i o n Children Grandchildren Other Loved Ones Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 27. GDOT-ISSUES Phantom income drives grantor to the poor house Grantor gives away future upside Grantor loses free use of assets Irrevocable Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 28. GDOT-ISSUES Phantom income drives grantor to the poor house Software valued at $1M Grantors cash on hand = $5M Grantors other (illiquid) assets = $20M Plan-transfer software to GDOT 5 years later software valued at $20M and sold Capital Gains taxes = $4M All taxed to grantor Cash on hand to pay taxes = $1M Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 29. GDOT-ISSUES Grantor gives away future upside and use of asset Software valued at $1M Plan-transfer software to GDOT 5 years later software valued at $20M and sold All proceeds owned by GDOT Use of proceeds controlled by GDOT Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 30. GDOT-ISSUES GDOT is an irrevocable trust Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 31. GDOT-NEXT SESSION Solutions to issues Drill down on the formation issues Creating “Grantor” trust status Choice of trustees Choice of beneficiaries Trust Protector Coverage Reporting Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 32. GDOT-NEXT SESSION Solutions to issues Drill down on the formation issues Creating “Grantor” trust status Choice of trustees Choice of beneficiaries Trust Protector Coverage Reporting Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 33. Issues Phantom income drives grantor to the poor house Revoke Grantor Status Return asset to grantor Prepay note exchange Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 34. Issues Grantor gives away future upside Keep part of asset Sell/gift the other part Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 35. Issues Grantor loses free use of assets If free control-use entity planning If needed for lifestyle-poor planning Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 36. Issues Irrevocable Trustees – of you can’t trust them, who can you trust? Trust protector Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 37. Creating “Grantor” trust status IRC § 675(4)(C) Someone holds a non-fiduciary right to reacquire the trust corpus by substituting other property of equivalent value Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 38. Creating “Grantor” trust status IRC § 675(2) Any non-adverse party can enable the grantor to borrow trust corpus for income without adequate interest or without adequate security, Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 39. Creating “Grantor” trust status IRC § 674 A non-adverse party has the power to add a beneficiary, other than after-born or after-adopted children Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 40. Creating “Grantor” trust status IRC § 677(a) The income of the trust may be used to pay premiums on a policy of insurance on the grantor's life or that of the grantor's spouse. Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 41. Choice of Trustees CPAs Attorneys Trust Companies Friends Relatives Beneficiaries Grantor’s spouse Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 42. Choice of Beneficiaries Spouse Children Grandchildren Dynasty Provisions Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 43. Trust Protector What is a trust protector Duties-usually none Powers Simple Complex Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 44. Coverage History Current thinking Old and cold 10% or more Guaranties Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 45. Reporting Separate return vs Statement Reporting Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011
- 46. Putting The Tools To Work GST Planning Family Bank Income Tax Neutral Divorce Protection Incentive Provisions Special Needs Planning Charitable Flexibility Funding Other Trusts Business Transfer Asset Protection Supercharge Life Insurance Copyright 2011, InKnowVision, LLC and Scott Hamilton 7/27/2011